Denver Bankruptcy Law Blog

One article on bankruptcy is quoted in words that this blog seeks to emphasize often, that being that bankruptcy "is never the end of the world...you can survive bankruptcy and come out on the other side more financially solid." There is often a lot of stigma surrounding the filing of bankruptcy. Some feel that this means that they have financially failed or don't know how to manage money. Often, this just isn't an accurate reflection of reality.

More commonly, individuals in Colorado and elsewhere looking to file for personal bankruptcy look to do so because of a culmination of adverse events. In a high percentage of cases, medical debts far exceed one's capability of repaying them without help. It is hardly fair for the individual looking to file to blame themself for getting sick.

ESPN issued a report a few years ago that detailed that within two years post-retirement, 78 percent of NFL players will file for personal bankruptcy. While much of this can be blamed by opulent life styles, a good portion of those that file for bankruptcy invested unwisely.

The majority of personal bankruptcy cases in Colorado are also due to poor investments or adverse events outside of the debtor's control, such as encountering medical debt. While the high-profile nature of sports stars leads the public to believe that it is only those that spend thousands on sneakers and lion skin rugs -- like Warren Sapp, the most recent former-NFLer to file under Chapter 7 -- that file for bankruptcy, that just isn't reality.

Contrary to popular belief, a high income does not in itself prohibit one from turning to Bankruptcy laws for financial relief. Rather, income, by virtue of the "means test," plays a factor in determining what Chapter of the Bankruptcy code is applicable for relief.

In 2005, Congress amended the Bankruptcy laws and introduced the infamous "means test" to push high income debtors into a Chapter 13 "repayment plan" as opposed to a Chapter 7 "straight bankruptcy." More than six years later, the means test remains the most discussed, disputed and frustrating aspect of Bankruptcy practice for attorneys, trustees and Judges alike.

Bankruptcy practitioners often mock the test as the "mean" or the "meaningless" test. Nevertheless, the means test is here to stay and it must be dealt with in each and every case.

The means test entails a two step formula-based mechanical approach to determine whether a given Debtor qualifies for Chapter 7 relief based on the income and household size or whether he or she has the means to afford at least some payment for up to five years in a Chapter 13 bankruptcy in exchange for a discharge of all remaining unpaid debts.

First, a Debtor's six months of income is added and doubled up to come up with the projected annual income. 

Debtors whose annual income is below their state's median income are deemed eligible to file for Chapter 7 relief and are exempted from completing step two of the means test.

Debtors whose annual income exceed the state's median income may still be eligible for Chapter 7 relief. Over-median income debtors must however complete step two of the test by preparing a "long form" means test.

A long form means test is a household budget that is created using a mix of IRS National and Local allowances along with some of Debtor's actual expenses. If the long form means test computations reveal zero or minimal left over money ("disposable income"), a Debtor "passes" the means test and qualifies for Chapter 7 relief even though his or her initial income was more than the median income.

However, if the computations reflect a significant disposable income, a Debtor "fails" the means test and must propose a five year Chapter 13 repayment plan. Many people misunderstand this to mean that a Debtor must pay a 100% of his or her debts in a Chapter 13 Bankruptcy. Instead, the monthly payments in a Chapter 13 Bankruptcy are determined by the left over amount in the means test in conjunction with the actual budget. After five years of payments, the Debtor gets a discharge of all unpaid unsecured debts.

Moreover, once in a Chapter 13, the means test allows for some additional expense deductions that are not allowed in a Chapter 7, like voluntary retirement contributions and retirement loan repayments. These additional deductions may further decrease disposable income and lower the Chapter 13 payment.

As you can imagine, the means test is another complex area of Bankruptcy law, but an important one as well. Means test deductions are a hot topic for litigation nationwide and are constantly evolving.

At the Law Office of Sharon W. Grossenbach, we give the means test its due attention in all of our Chapter 7 and Chapter 13 cases. We are always staying on top of new case law development on allowable means test deductions and strive everyday to tackle the mechanical test with meticulousness and creativity.

Call us to learn more about how the means test may affect your bankruptcy filing.

Earlier this week, I had a chance to share several questions I think everyone should ask before deciding to hire a bankruptcy attorney. Since filing bankruptcy is a major life decision, let's take a look at 5 more questions you want answered before deciding on an attorney.

6. Does it make sense to file? What are the pros and cons of filing? Is there another way?